Minnesota lawmakers are considering a $5 surcharge to all homeowners and vehicle insurance policies to bolster struggling police and fire pension plans.

The surcharge, which would generate an expected $23 million per year, is intended to make up for recent drops in revenue from long-standing taxes on auto and homeowners insurance policies, and to pay down past funding shortfalls.

Half of the money would go directly to two pension funds to help pay down existing unfunded liabilities. The remainder would be divvied up among the various city, county and state entities to help pay their portion of pension contributions for police, fire, state patrol and other state public safety workers.

Rep.

Joe Atkins, DFL-Inver Grove Heights, said this would "provide a little additional reliability to funding for our firefighter and police pensions," which are a key recruiting tool, particularly for volunteer fire departments.

Critics say the plan sets a bad precedent.

"These are obligations that should be borne by everyone in the state ... not just insurance purchasers. ... There are better ways to do that, and it's not this way," said Mark Kulda, vice president of public affairs for the Insurance Federation of Minnesota.

The bill goes before the Legislative Commission on Pensions and Retirement on Tuesday, March 5.

The plans that cover police, fire, state patrol and other public safety workers are among those in the most dire financial straits.

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The two statewide plans, which don't include volunteer fire departments, have a combined $1.8 billion in unfunded liabilities.

The state patrol plan, which is part of the Minnesota State Retirement System, needs about an additional $7.6 million each year to make up its shortfall between its contributions (plus investment returns) compared with the amount needed to pay benefits and cover past unfunded liabilities. Filling this with employee and/or employer contribution increases would require an additional 11.5 percent of an employee's pay, on top of what is already being paid.

The Public Employees Retirement Association police and fire fund needs an additional $64 million each year -- the equivalent of about 7.9 percent of each employee's pay.

The pension commission also will discuss two other proposals intended to shore up the PERA police and fire and MSRS state patrol plans. Both call for increasing employee and employer contributions, making it less financially attractive to retire early and other changes that reduce costs for the plans.

Atkins said his bill is intended to fill the remaining financial gap that these other proposals leave behind.

Taxes on homeowners and auto insurance policies pay a large portion of pension costs for police and firefighters in Minnesota. The fire insurance tax has been in place since the 1870s; the auto insurance tax started in 1971.

Brian Rice, a lawyer representing police and fire unions, said the auto insurance tax fell from a high of $72 million in 2004 to $60 million last year, and the fire insurance tax fell from a high of $32 million in 2006 to $21 million.

"That means cities are having to put in more of their property tax dollars to fund the pensions," Rice said.

Under Atkins' proposal, about $5.5 million would go toward volunteer firefighter pensions. Currently, the majority of those volunteers get a one-time lump sum of $30,000 or less after serving 20 years. This surcharge would increase that to $37,500.

"I suspect that if this were to play out, and we were to continue to underfund pensions, you'd get fewer and fewer people willing to be firefighters," Atkins said.

He predicted this would lead to increased homeowners insurance premiums and could force smaller cities to switch to the more expensive full-time fire departments.

Mark Haveman, executive director of the Minnesota Center for Fiscal Excellence said in a statement that the proposal is "an opaque, backdoor attempt to surreptitiously channel additional dollars to support these underfunded plans outside of general taxation where the burden belongs."

Haveman said an insurance surcharge should be used "for the risks and costs associated with those actually being insured, not to address the risks and costs of government compensation structures."

Kulda said the tax is hidden from policyholders, but that surcharges, which are noted separately on statements, are unpopular. Unlike other surcharges -- such as one that funds auto theft prevention efforts -- this one doesn't have a "direct correlation to a service provided," Kulda said.

"It's really not raising that much money to solve a really, really large problem," Kulda added. "I think the concern is that if it goes on, would there be a time when they raise that amount?"

George Winiecki, owner of Win Insurance in St. Paul, said he's concerned about the overall principal of all taxpayers paying pension shortfalls for a relative few.

"Nobody's making up the shortfall in my pension program, except me. And that means I have to work longer," said Winiecki, noting that his 401(k) lost a lot in the recent market downturn. "Why do I have to make up the shortfall in (their pension) and mine?"